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Salary sacrifice is offered by many employers now as a flexible way to remunerate employees. It can save tax for both employer and employee, but it can also adversly affect things like maternity, mortgage applications and life cover. The new 2015 NHS pension scheme also presents a different set of issues. See this win-win case study of a salary sacrifice solution worth making.
Salary sacrifice for doctors and dentists
Doctors and dentists that own a dental or medical practice and employ staff, may be interested to understand about salary sacrifice as an offering to employees.
On the other hand, doctors and dentists that are employed, either by a private practice employer or by the NHS would be interested to understand if salary sacrifice is worthwhile.
The benefits of salary sacrifice
The idea of salary sacrifice is straightforward. Instead of cash remuneration, an employer provides an alternative non-cash benefit to the employee. This could include childcare vouchers, gym membership, parking or additional pension contributions.
For the set-up to be financially beneficial for both employer and employee, the benefit needs to be tax exempt.
If there is a tax implication then the mutual benefit may not work as well.
One key benefit though of salary sacrifice is that because the overall salary is reduced, the employees and employers tax and NI are also reduced. It is an option therefore for employers to pass on these savings to the employees as an incentive.
Considerations for the employee
Even though there are potential tax savings and other benefits if opting for a salary sacrifice arrangement, it needs to be carefully weighed up by the employee.
Points to consider:
- What is the cost of the salary sacrifice?
- How much is the salary reduced by? This could affect the income presented on mortga
ge applications and life cover policies. Childcare vouchers can also affect any tax credits. - How does the salary sacrifice offer compare to what could be actually purchased? Fo
example, could you find a cheaper gym membership? - The impact on a pension such as the 2015 NHS CARE (Career Average Revalued Earning) Scheme
Considerations for the employer
Employers similarly, need to assess key factors before offering a salary sacrifice to their workforce:
- Are they benefits the employees would find valuable?
- What are any extra costs to the business?
- Is there time to manage the compliance and admin?
- Careful communication to employees who are part of the 2015 NHS scheme is important, ensuring they are aware of the impact on their future pension.
Salary sacrifice for pensions
This table shows the results of a case study where a salary sacrifice provides mutual financial benefits for employer and employee.
Background notes:
- This employee has a salary of £75,000, age 45
- They contribute £10,800 into a SIPP, paying £14,400 initially, grossed up by basic rate tax relief of £3,600, which is later claimed on the self assessment tax return.
- This means the gross pension contribution is £18,000
- The employer agrees to pay the pension contributions of £18,000 + the tax and NI saved into the employees pension.
Before sacrifice | After sacrifice | Pension boost | |
---|---|---|---|
Gross salary | £75,000 | £56,379 | |
Income tax paid | £12,203 | £11,955 | £248 |
Employee NI | £4,771 | £4,399 | £372 |
Employee gross contribution | £18,000 | ||
Take home pay | £40,026 | £40,026 | |
Employer NI | £9,230 | £6,661 | £2,570 |
Total paid into pension | £18,000 | £21,190 | |
'Boost' due to sacrifice | £3,190 |
The results show:
- The employer is happy to offer a salary sacrifice as the company profits are not affected
- The employee has the same take home pay as before
- There is an 18% increase in pension savings
NOTES
This Case Study was provided by Standard Life
Income tax bands
– £1 to £31,785 @ 20%
– £31,786 to £150,000 @ 40%
– Over £150,000 @ 45%
NI bands
– Employees NI – 12% on earnings between £8,060 and £42,385 and 2% on earnings over £42,385
– Employers NI – 13.8% on all earnings above £8,112
Take care with a CARE pension scheme
The NHS 2015 Pension scheme is a CARE scheme so doctors and dentists who are members need to be aware of the impact that a salary sacrifice could have on the future NHS pension.
As the salary sacrifice reduces the level of gross pensionable pay it means also that reduced NHS pension benefits are built up in that period.
Balancing the scales
Whilst the theory behind salary sacrifice is simple, there are considerations that need to be factored in, particularly regarding salary sacrifice and pensions. Age, planned age of retirement, employment status, salary and personal circumstances all play part in ensuring the decision is worthwhile.
Dental & Medical Financial Services are specialist advisers to doctors and dentists which means we understand the NHS pension well and can provide holistic advice about your retirement plan as a whole.
Tel: 01403 780 770